QDRO

[austin3515]

Somoene gets a QDRO of $100K. If they take $30K today, and $70K next year, are both payments exempt from the 10% penalty? Assume they do not rollover (of course). Someone is suggesting that the second distriubion is not exempt, but the code plainly says distibutions pursuant to a QDRO are exempt.

[QDROphile]

If the Code is clear, what has "someone" offered as an explanation for the assertion that causes you to be concerned?

[mbozek]

Somoene gets a QDRO of $100K. If they take $30K today, and $70K next year, are both payments exempt from the 10% penalty? Assume they do not rollover (of course). Someone is suggesting that the second distriubion is not exempt, but the code plainly says distibutions pursuant to a QDRO are exempt.

Under 72(t)(2)© all distributions pursuant to a QDRO are exempt from the 10% tax. There is no limitation on time of distribution after QDRO is issued. What creates ambiguity is whether the distribution to the AP is made pursuant to the QDRO or otherwise made under the terms of the plan. If the QDRO awards the AP $100,000 and allows withdrawal of the 100k then all distributions are pursuant to the QDRO regardless of when made. If the QDRO orders the participant's profit sharing account to be split equally betwen the parties and 100k put into a separate account of the AP as a beneficiary and the distribution is made under a plan provision that allows distribution at any time there is a question of whether the withdrawal by the AP is pursuant to the QDRO or is made pursuant to the plan provision which is subject to the 10% tax.

[austin3515]

If the QDRO orders the participant's profit sharing account to be split equally betwen the parties and 100k put into a separate account of the AP as a beneficiary and the distribution is made under a plan provision that allows distribution at any time there is a question of whether the withdrawal by the AP is pursuant to the QDRO or is made pursuant to the plan provision which is subject to the 10% tax.

So you're suggesting that there might be a time limit? Say the person waits 4 years to close their account. Are you saying someone might argue that the distribution was not pursuant to a QDRO?

[GMK]

Not a time limit, but rather, a completion of the processes required by the QDRO.

If the QDRO says to split the account, giving part to the AP, then when the split has been completed, the requirements specified in the QDRO have been met. What happens after that is not controlled by the QDRO, but by the terms of the plan.

[david rigby]

...take $30K today, and $70K next year...

As permitted by the plan? QDRO cannot create this mechanism of distribution.

[mbozek]

Not a time limit, but rather, a completion of the processes required by the QDRO.

If the QDRO says to split the account, giving part to the AP, then when the split has been completed, the requirements specified in the QDRO have been met. What happens after that is not controlled by the QDRO, but by the terms of the plan.

Correct. If the QDRO only orders a division of the participant's account and the distribution is determined according the provisions of the plan, there is an issue that the distibution is not being made pursuant to the QDRO. If the QDRO provides for the AP's interest to be distributed is doesnt matter how many distributions are made by the AP.

[austin3515]

What if the document did not mandate lump-sums, but allowed partial distributions? You're saying a QDRO mandates single lump-sum distributions?

[GMK]

The QDRO can require a single lump sum distribution if the Plan allows single lump sum distributions.

If the DRO requires something that the Plan did not already allow, then the DRO is not qualified.

[masteff]

there is an issue that the distibution is not being made pursuant to the QDRO.

Do you know of any tax court cases or PLRs showing the Service has adopted this point of view?

The concensus I'm aware of, and my google searching concurs, is that if the money is distributed at any time from the plan in which the QDRO occurred, then the distribution is exempted from the early withdrawal penalty; but if the money is moved out of that plan to any other plan or IRA, then it loses the QDRO exemption and subsequent w/drwls are subject to the penalty.

[austin3515]

So it sounds you look agree that my two distributions should both be exempt from the 10% penalty? I must have read the same articles as you

[mbozek]

So it sounds you look agree that my two distributions should both be exempt from the 10% penalty? I must have read the same articles as you

If the distributions to the AP are made pursuant to the QDRO. Its up to tax counsel to make that call.

[mbozek]

there is an issue that the distibution is not being made pursuant to the QDRO.

Do you know of any tax court cases or PLRs showing the Service has adopted this point of view?

The concensus I'm aware of, and my google searching concurs, is that if the money is distributed at any time from the plan in which the QDRO occurred, then the distribution is exempted from the early withdrawal penalty; but if the money is moved out of that plan to any other plan or IRA, then it loses the QDRO exemption and subsequent w/drwls are subject to the penalty.

I think the operating assumption is that any distribution to an AP of benefits awarded under a QDRO is pursuant to a QDRO even if there is no distribution language and I doubt whether any AP would ask for a ruling on this issue as long as the distribution is coded as a distribution exempt from the 10% penalty. Also many plans have provisions that permit distributions to an AP at any time if a QDRO has been approved by the plan admin which provides plausability that the distribution is made pursuant to the QDRO.